Educational Articles

Stock Screen: Best & Worst Performing Industries - February 22, 2013

Robert M. Greene, CFA
| February 22, 2013

Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).

The equity markets have gotten off to a strong start in 2013, and this is evident in our latest Industry Price Performance ranking, which covers the period from January 8th to February 19th. Overall, the Value Line Arithmetic Average rose 6.9% during this stretch and, to qualify for a spot in our top seven, an industry needed to advance at least 12%. The Securities Brokerage group was the top performer over the past six week, climbing nearly 18%. Others able to secure a spot at the top of our rankings were Shoes (+14%), Advertising (+13%), Entertainment Technology (+13%), Oilfield Services & Technology (+12%), Retail-Hardlines (+12%), and Power (+12%). In looking for investment ideas among the best-performing industries, we are focusing our attention on two of the biggest names in the Oilfield Services industry. The shares of both Halliburton (HAL) and Schlumberger (SLB) have contributed to that industry’s popularity with investors so far in 2013; HAL stock has climbed 23% in price year to date, while SLB stock has added 16%.

Schlumberger Ltd is the world’s largest oilfield-services provider. In fact, its market capitalization of roughly $105 billion is more than double that of its nearest rival. The company’s products and services, which cover the entire life cycle of crude oil and natural gas reservoirs, produced more than $42 billion in revenues in 2012, up 7% from the previous year. Schlumberger’s largest market is North America, but it does business around the world, including Latin America, the Middle East, and Africa. Operations outside of North America, in fact, generate nearly 70% of revenues and pre-tax profits.

The company is coming off a solid year, which saw share net climb 16%, to $4.06 a share. The North American natural-gas drilling market has been a trouble spot of late, though, and the near-term outlook there isn’t especially bright, either. In fact, weak prices for this commodity have many concerned that this market is facing an extended slowdown. Notably, the combined rig count for the U.S. and Canada figures to decline slightly this year. With this in mind, we have cut our 2013 earnings estimate by about $0.25 a share since last fall. Still, the company is likely to make good progress in its international and deepwater operations, which should help to keep the bottom line advancing at a double-digit clip in 2013. In all, we look for full-year share net to reach $4.75, above the previous peak of $4.42 reached in 2008.

Overall, SLB stock looks to be worthy of a closer look by patient investors. The company appears well positioned to help oil and gas producers to meet the rising demand for energy over the next 3 to 5 years, with annual earnings likely surpassing $7.25 a share by 2016-2018. This, combined with prospects for a modest expansion in the stock’s P/E multiple, give it attractive long-term appreciation potential. In the meantime, the equity provides a respectable, well-covered dividend (yield: 1.6%). Too, the company’s size, diverse revenue base, and excellent finances ought to help insulate shareholders, to a degree, from the volatility often associated with the oil and gas industry. This equity is ranked 2 (Above-Average) for Safety, meaning more-conservative investors should be comfortable taking a position here.

Halliburton is a leading provider of energy services across the globe, generating revenues of $28.5 billion last year, up 15% from 2011. Its operations span about 80 countries but, compared to Schlumberger, its profit prospects are more closely tied to North America, which accounted for about 60% of 2012 pre-tax earnings. The weakness in natural-gas drilling in this part of the world took a toll on last year’s earnings, which declined 15%, to $2.78 a share. Assuming activity in this part of the world doesn’t deteriorate too much further, the international business should be able to pick up the slack in 2013, allowing share net to stage a partial profit recovery to $3.10. Moreover, profits figure to approach or surpass $5.00 a share by the 2016-2018 period, as the company capitalizes on its ability to help customers pump more oil and gas from mature fields and tap unconventional locations, such as deepwater fields. With this in mind, HAL stock appears to offer good price-appreciation potential for the 3 to 5 years ahead. This equity, though, is only an Average (3) selection for Safety and features a comparatively modest dividend yield (0.8%).

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.